The Financial Impact of Readmissions

June 5, 2012

Readmissions are no new occurrence in hospitals and with 20 percent of Medicare patients readmitted a year, they also are not uncommon.  Medcap reported that readmissions within 30 days accounts for 15 billion dollars of Medicare spending.  New legislation signed into law by President Obama will penalize those hospitals that have high preventable readmission rates.

Why the penalty for readmissions?  Beyond the exorbitant cost to Medicare each year, readmissions often mean poor quality of care.  Research shows that patients who were readmitted were 55 percent more likely to have had a quality of care problem.

But, with the current Medicare fee for service are hospitals really incentivized to decrease their readmissions?  Hospitals are paid per discharge, not by the amount of time a patient is in their care, or the quality of care they provide.  A hospital with poor discharge instructions (more likely to readmit) receives the same fee as a hospital with top quality discharge instructions.  So, is it really surprising hospitals are having high readmission rates?

What do these penalties look like? The Center for Medicare and Medicaid finalized the calculation of a hospital’s excessive readmission ratio for Acute Myocardial Infraction, Heart Failure and Pneumonia.  The ratio compares a hospital’s readmission rate to the national average.   CMS will use the risk adjustment methodology (endorsed by the National Quality forum), which takes into account factors such as demographic characteristics, comorbidities, and patient frailty.

The result is this ratio:

Excess readmission ratio (finalized in FY 2012 IPPS/ LTCH PPS rule) = risk-adjusted predicted readmissions/ risk-adjusted expected readmissions

The penalties will be in effect beginning FY 2014 and will result in a one to three percent pay reduction.

Are these reductions enough to encourage hospitals to invest in changes to reduce readmissions?  Since other payers are behind Medicare in their ability to penalize, hospitals may be giving up revenue from other payers by reducing readmissions.   If a hospital avoids a readmission can they replace that admission with patients waiting for a bed?   If the bed remains empty how much variable cost can the hospital avoid?

These are factors that hospitals must consider in building a complete picture of the financial impact of readmission strategies.

Solutions for Bundled Payments

October 5, 2011

With Centers for Medicare and Medicaid Service’s continued interest in the creation of bundled payment system, providers will be at increasing risk of unanticipated impact.  The Bundled Payments for Care Improvement initiative is an attempt to improve quality and reduce cost by providing a single payment for multiple providers within one episode of care.  The goal of improved coordination between hospitals and physicians is expected to be realized by aligning the financial outcome for the two groups.

Providers interested in such initiatives may also wish to create a pricing strategy to take advantage of the new reimbursement terms.  Although this may be a wise course, providers should consider the potential impact on all payers’ reimbursements.  As long as the hospital fee structure ties to one price for each service, changes in strategy will impact all payers.  The ability to model and develop strategies around all payers is critical to the success of such initiatives.  At Applied Revenue Analytics,  we are able to model such strategies with unparalleled accuracy.

Historically, a hospital’s success has had little to do with the ability to develop a pricing strategy.  With the introduction of episode-based reimbursement, there is an opportunity to design a pricing strategy around such episodes.  Hospitals have spent much time understanding what they will “accept “ in managed care agreements, but little time on what pricing can do to the competitive landscape.  What if a hospital could develop one set of prices, to all payers including self pay, for endoscopy procedures?   Would that change the marketing process for that hospital?  The ability to accurately calculate the change in net and gross revenue for various strategies becomes paramount to the deployment of those strategies.  Factors such as volume of the current mix of services by payer and their associated payment terms must be considered.  Our hypothetical endoscopy usually involves services from at least five different clinical departments.  Professional services could also be put in the mix.

Bundling of services offers providers and payers an opportunity to transform healthcare, service by service, from a customized product built one by one to a uniform quality service with predicable financial and quality outcomes.

Written by: Seth Avery, Chief Executive Officer

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